United States: CFPB Prohibits Considering Down Payments for Non-QMs

Once again, the Consumer Financial Protection Bureau ("CFPB") is providing compliance tips through its Supervisory Highlights for lenders making non-Qualified Mortgages ("non-QMs"). In its latest set of Highlights, the CFPB addresses how a lender must consider a borrower's assets in underwriting those loans, and clarifies that a borrower's down payment cannot be treated as an asset for that purpose, apparently even if that policy has been shown to be predictive of strong loan performance.

The Dodd-Frank Act and the CFPB's Ability to Repay Rule generally require a lender making a closed-end residential mortgage loan to determine that the borrower will be able to repay the loan according to its terms. A lender may choose to follow the Rule's safe harbor by making loans within the QM parameters. Alternatively, a lender may opt for more underwriting flexibility (and somewhat less compliance certainty). When making a non-QM, a lender must consider eight mandated underwriting factors and verify the borrower's income or assets on which it relies using reasonably reliable third-party records. As one of those eight factors, the lender must base its determination on current or reasonably expected income from employment or other sources, assets other than the dwelling that secures the covered transaction, or both.

The CFPB's examiners evaluate a lender's ability-to-repay determination by reviewing the lender's policies and procedures and a sample of loan files, assessing the facts and circumstances of each loan in the sample. The agency reviews whether the lender considered the required underwriting factors and properly verified the information on which it relied. The CFPB's Supervisory Highlights remind lenders that the records a creditor uses for verification, including to verify income or assets, must be specific to the individual consumer. If the lender is making its determination based on the borrower's assets and not income, the CFPB will look to see whether the lender found that the borrower's assets were sufficient to repay the loan according to its terms, in light of the lender's consideration of the other eight factors (i.e., the payments on the transaction, any simultaneous loan, mortgage-related obligations, other debt obligations, alimony and child support, the DTI ratio or residual income, and the borrower's credit history).

We have pointed out previously the Rule's paradox that while a lender making a non-QM is not required to consider or verify the borrower's income if it reasonably finds the borrower's assets to be sufficient, the lender nonetheless must consider and verify a borrower's DTI ratio or residual income. In this latest set of Supervisory Highlights, the CFPB attempts to explain that if a lender seeks to make the ability-to-repay determination without considering income, it might calculate and consider the residual income factor by subtracting the borrower's total monthly debt obligations from his or her verified assets.

Also in this recent set of Highlights, the CFPB states emphatically that a down payment cannot be treated as an asset for purposes of the Rule. While a relatively larger down payment will result in a lower loan amount (all else being equal), thus increasing the borrower's ability to repay the loan, the CFPB states that the size of a down payment does not directly indicate a consumer's ability to make the loan payments, and must not be considered for that purpose.

In addition, while the official commentary to the Rule has always provided that a lender could establish the reasonableness of its underwriting determination by showing that its standards resulted in historically low rates of delinquency/default during adverse economic conditions, we understand now that such a showing would not likely be sufficient if the lender relied solely on the borrower's down payment. The CFPB states that it cannot imagine circumstances in which reliance on a down payment, without other verified assets or income, would be reasonable or in good faith for purposes of the Rule, "even where the loan program as a whole has a history of strong performance."

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